What the Unemployment Rate Misses
In his Economic Scene column in today's New York Times, David Leonhardt discusses the challenges of measuring unemployment and using the unemployment rate to assess the state of the labor market. In a nutshell, we have a fairly low official unemployment rate and yet many people not working. In this excerpt, he focuses on a distinction that his colleague Paul Krugman once glossed over (to much fanfare in my first month of blogging):
There are only two possible explanations for this bizarre combination of a falling employment rate and a falling unemployment rate. The first is that there has been a big increase in the number of people not working purely by their own choice. You can think of them as the self-unemployed. They include retirees, as well as stay-at-home parents, people caring for aging parents and others doing unpaid work.As we discussed briefly then, the BLS does collect measures of unemployment that progressively relax the condition that individuals have to be actively looking for work. Leonhardt characterizes them as "broader but not especially useful." I don't think they should be dismissed so readily. They are found in Table A-12 of the monthly employment report. You can get the historical data here. Let's go to the picture.
If growth in this group were the reason for the confusing statistics, we wouldn’t need to worry. It would be perfectly fair to say that unemployment was historically low.
The second possible explanation — a jump in the number of people who aren’t working, who aren’t actively looking but who would, in fact, like to find a good job — is less comforting. It also appears to be the more accurate explanation.
The 4 curves are as follows:
- Blue: The conventionally measured unemployment rate, currently at 5 percent and low by historical standards. This is the number unemployed divided by the total number in the labor force (employed plus unemployed).
- Red: Add people classified as discouraged workers--those who have given a job-market related reason for not currently looking for a job--to the unemployed. The increase is very slight--historically between 0.1 and 0.4 percentage points.
- Yellow: Add people classified as marginally attached (beyond being discouraged)--those who currently are not looking for work but indicate that they want and are available for a job and have looked for work sometime in the recent past. This currently adds 0.8 percentage points to the unemployment rate, which is typical of the full 14 year time period.
- Green: Add people classified as employed part time for economic reasons--those who want and are available for full-time work but have had to settle for a part-time schedule. This number is currently 9 percentage points of the labor force (augmented to include those marginally attached or employed part time for economic reasons).
The more comprehensive measures of labor underutilization are available and are consistent with the story being told in the article, though you have to get to "employed part time for economic reasons" to get much of a gap. I think they would be more "useful" to journalists if journalists chose to report them.
Barry Ritholtz also comments on the story and refers back to a measure of the "augmented unemployment rate," which doesn't include the economic part timers but also doesn't require that those who want a job have actually looked for one. (This information can be calculated from Table A-1 of the monthly employment report.) At present, there are about 5 million who "want a job" among the roughly 80 million who are not in the labor force, or about 6.25 percent. This proportion has stayed around 6 percent for several years.
7 comments:
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Women are dropping out of the paid workforce in large numbers.
Time after time we see press reports of hundreds of people lining up to apply for jobs at a newly opened Wal-Mart. Some people like to see all these jobs applicants as a measure of how great Wal-Mart is. Maybe, but rather i view them as a measure of the concealed or hidden unemployment and underemployment in the overall economy.hundreds of people apply for a mediocre job at Wal-Mart is a signal of how our system is not functioning very well.
The obvious correlate to look at is wages. Stagnant wages in a growing economy say something.
-Barry
There are 1.5 million real estate agents who are seriously underemployed, not counted in these numbers because they are officially employed. Also my friend the independent mortgage broker, I notice he's no longer showing up at Starbucks in the morning for a latte.
Other self-employed types are taking a huge whack as well . . . those in construction, my dentist (people put off going when the going gets tough), veterinarian (ditto, Buddy isn't getting his annual tooth cleaning), etc. This is a large class of (now underemployed) people.
The figure you presented is a good illustration of the political flavor of your statements. You just want the number to be as large as possible. On the other hand, all curves in the figure look like similar. In that sense, having one of the definitions of unemployment is enouth to obtain all others - these definitions just represent different, but fixed, portions of some "true" unemployment. Theoretically, one can use any definition for economic study since they are equivalent.
Politically, in the year of elections, Democrats like the upper exstreem, and Republicans - the smallest possible value. If Dems will win, one caould expect the next election will bring opposite situation in unemployment definition used.
Real problem is - what does drive unemployment changes?
Results of some short study.
Figure 1. Ratio of part time emloyees and unemployed (BLS definition). Theis ratio has been increasing since 2003 - mopre and more people got some paid job. UE rate has been decreasing since 2003. So, now more people likely tolose part time job and move to unemployed. Not sure that this is better.
http://thumbsnap.com/v/MpY5CDzM.gif
Figure 2. Imagine that people react to the opportunity to get paid job somehow. Then increasing labor force would encourage some of them to join labor force when they were not in labor force. With some obvious lag. Decreasing change rate of labor force would apparently discourage these people and some more who lost jobs. When the labor force change rate suddenly turns from some elevated growth rate to lower one, i.e. the labor market starts to grow not at the rate to accomodate all who want job as a reaction to previous strong market - unemployment increases. The opposite turn results in decreasing unemployment, with some lag behind the change in labor force growth rate. This effect with lag time of 4.5 yeras is observed in reality as Figure 2 demonstrates:
http://thumbsnap.com/v/n00TuyPy.gif
Therefore, labor force changes lead unemployment changes by 4.5 years. No R or D - just economy, where labor force has not been growing evenly.
The next short-term move in the UE is likely downward, but then - growth will be observed
Figure 3 provides a smoothed view on noisy monthly estimates of labor force and unemployment rate.
http://thumbsnap.com/v/oGEWtqVt.gif
So, where do I fit this graph? Where do people who make a living, but do not work for someone add in? I am an artist, and in this economy people have stopped buying paintings. (Not just mine, but most artists I know are in similar straits). We are not "workers" in the "job market" as we are not interchangeable in an equation. We all do something relatively unique. We "generate" income, but do not work for an employer. WE are out looking for jobs now where we are employed by someone else, a statistically "real" category. Interestingly, MOST people I happen to know are similarly "self-employed" is some sort of service provision or hand made product, or simple service like handyman or house cleaner. As people tighten up the purse strings, all of them stop making an income. But, we do not show up on any statistical charts. I suspect that if you were able to quantify us, the number of people out there who were generating income (including both employed and self employed) who are now NOT generating income, the numbers would be MUCH higher.
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